Bank Of England Cuts Rate To Help Businesses Cope With Covid-19 Cash Problems

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March 11 saw the Bank of England announce measures to help business, especially SMEs, respond to the economic shock from the coronavirus (Covid-19) pandemic.

The Monetary Policy Committee (MPC) has reduced the Bank Rate and launched a new Term Funding Scheme with additional incentives for SMEs.

A statement said that the Bank of England’s role is to help UK businesses and households manage through an economic shock that could prove sharp and large - but should be temporary. 'These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm,' the statement reads.

 “Temporary, yet significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies”

– Bank of England 

Monetary Policy Committee

'Indicators of financial market uncertainty have reached extreme levels. Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the UK over the coming months. Temporary, yet significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses'.

The MPC voted unanimously to reduce Bank Rate by 50 basis points to 0.25% and the MPC also voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

Low interest rates

'The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households and to reduce the cost, and to improve the availability, of finance,' continued the statement. 

'When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at or very close to, Bank Rate.

Additional funding will be available for banks that increase lending, especially to small SMEs. Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

The TFSME will:

• Help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions.

• Provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets.

• Incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption.

• Provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.

Picture: The Bank of England will help banks to help SMEs, with cashflow issues arising from the coronavirus pandemic.

Article written by Cathryn Ellis
10th March 2020

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